Wednesday 923

 

Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.

PART 10 Money and Prices in the Long Run
Chapter 29 of 36 The Monetary System
Section 20 of 20
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A bank run occurs when depositors worry a bank may go bankrupt and run to the bank to withdraw their money as cash from the bank’s vault.
Bank runs are an inherent problem for banks in a fractional-reserve banking system.
Because a bank holds in reserve only a fraction of its deposits and loans out the rest it cannot satisfy withdrawal requests from all depositors at once.
When a run occurs the bank is forced to close until
· some bank loans are repaid
· the Fed provides it with currency
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During the Great Depression in the early 1930s there was a series of bank runs and bank closings.
Households withdrew their deposits from banks, preferring to hold their money as currency at home.
This reversed the process of money creation, money was destroyed rather than created.
Banks told people with loans they had to repay them to banks.
This money was returned to depositors, many of whom then held the money at home as cash.
Less money deposits in banks meant less reserves.
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Bankers responded to falling reserves by reducing loans.
Bankers also increased their reserve ratios so they would have more cash on hand to meet demand for withdrawal.
The banks’ higher reserves ratios
· resulted in holding more currency in vaults
· which decreased the money multiplier
· which further decreased the money supply
From 1929 to 1933 the money supply fell 28%.
Economists generally contend this huge fall in the money supply and decreased amount of loans caused the subsequent high unemployment and falling prices.
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Currently bank runs can happen but are not a serious problem for the U.S. banking system.
The federal government now guarantees the safety of deposits at most banks
through the Federal Deposit Insurance Corporation (FDIC).
Bank runs now are rare because depositors are confident even if their bank goes bankrupt the FDIC will repay the deposits.
The FDIC insurance creates a moral hazard situation.
Because deposits are guaranteed bankers have little incentive to avoid risks when making loans.
But overall deposit insurance has resulted in a more stable banking system.
(end of chapter 29)
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bank bankruptcy
ginkō tōsan
銀行倒産
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Who pays for the FDIC insurance? ChatGPT:
FDIC insurance is paid primarily by FDIC-insured banks and savings institutions, not directly by depositors or taxpayers.
Banks pay insurance premiums into the FDIC’s Deposit Insurance Fund, with riskier institutions generally paying more.
If the fund were ever insufficient, the FDIC can borrow from the Treasury.
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Congratulations! 29/36 = 81% of way to becoming competent economist.